INTERNATIONAL BUSINESS; European Regulators Prepare to Grapple With 2 Possible Music Industry Mergers

For a record company, the worsening state of the industry is hardly a reason for cheer, unless you are planning a merger with a big rival.

European competition regulators are in the process of revisiting the music industry, even though they concluded three years ago that any further consolidation among the big five record companies would harm competition.

This week competition regulators were preparing themselves for two possible mergers among those same big five companies. How they assess a planned joint venture between Sony and BMG, the music arm of the German publisher Bertelsmann, and an anticipated fresh attempt by EMI and Time Warner to team up, may depend on which deal arrives at their doorstep first.

Whoever notifies first has a better chance of being granted approval, competition lawyers in Brussels said on Friday. ''If two deals are notified almost simultaneously, then the commission could examine them together and both deals would have the same chances of gaining approval,'' said Alec J. Burnside, a partner in the law firm of Linklaters.

In addition, a deal that reduced the number of major players from five to four would obviously pose fewer problems than one that reduced the number from four to three. ''It can be an advantage being first,'' Mr. Burnside said.

It helped Price Waterhouse in merging with Coopers & Lybrand. The two accounting firms notified the commission of their plans to merge shortly before the rivals Ernst & Young and KPMG gave notice of a similar deal. The commission tried to delay the first investigation so it could assess the two deals together, but eventually had to push ahead with approving PricewaterhouseCoopers. Ernst & Young and KPMG later abandoned their merger.

Even so, given current conditions in the music market, and recent events in the European Court of First Instance, a music engagement that arrived second at the desk of Mario Monti, the European competition commissioner, would stand a better chance now than it would have three years ago.

In 2000, the commission was about to prohibit EMI and Time Warner's merger when the deal was withdrawn. At that time, Mr. Monti was concerned that the five music majors would turn into four. The collective strength of so few companies could skew the market and result in higher prices for customers, the commission argued.

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Today, however, prices of CD's are, if anything, falling, while illegal sharing of music on the Internet has made an alarming dent in music sales. The pain felt across the industry will not go unnoticed by the European Commission, another lawyer who is involved with one of the deals said on condition of anonymity.

Mr. Burnside said the effects of file sharing would be taken into account by the regulators. ''I imagine the commission will look at the impact of digital piracy on the music market,'' he said, adding that the commission would probably not try to redefine the market to account for the illicit new distribution channel, which would be impossible to do accurately.

''It's the sort of external constraint that would influence the commission's assessment,'' he said.

The European Commission also has a record of being reversed in court in cases in which it had said a cluster of companies could become collectively dominant. That history may now play into the hands of lawyers defending any pending combinations in the music industry.

Last year, for example, the Court of First Instance, the union's second-highest court, overturned a commission decision prohibiting the British travel company Airtours from taking over the travel agency First Choice, because it said the commission failed to prove that the deal would result in a collectively dominant number of players in the market.

''How far will the commission be willing to push the theory of collective dominance now?'' Mr. Burnside asked. ''It's a different ballgame after the Airtours ruling. The commission is a lot more careful in all its assessments after that appeal. It will be especially cautious when dealing with the question of collective dominance.''

Neither Sony-BMG nor any possible combination between EMI and Time Warner would knock Universal Music from the top spot in the music industry, so any merger assessment would not have to deal with the issue of single dominance.

''It's going to be easier to gain approval in Brussels than it was three years ago,'' said the lawyer involved in one of the pending deals. ''The question is, How much easier?''

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A version of this article appears in print on November 8, 2003, on Page C00003 of the National edition with the headline: INTERNATIONAL BUSINESS; European Regulators Prepare to Grapple With 2 Possible Music Industry Mergers. Order Reprints|Today's Paper|Subscribe